Measuring the Impact of Fdi on Economic Growth in Nigeria

Transcription

1 Current Research Journal of Social Sciences 4(5): , 2012 ISSN: Maxwell Scientific Organization, 2012 Submitted: August 16, 2011 Accepted: March 02, 2012 Published: September 25, 2012 Measuring the Impact of Fdi on Economic Growth in Nigeria 1 M.S. Ogunmuyiwa and 2 O.J. Ogunleye 1 Department of Economics, Olabisi Onabanjo University, Ago-Iwoye, Nigeria 2 Department of Accounting, University of Lagos, Lagos, Nigeria Abstract: This study investigates the impact of FDI on Nigeria s economic growth process. In an attempt to do this, the paper tests the validity of the modernization or depending hypothesis by employing various econometric tools such as Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests, Johansen Cointegration test, the Error Correction Mechanism (ECM) and Granger Causality test on time series data from The results reveal that a long run relationship exists between the variables and a unidirectional causality from FDI to growth was also established. Thus, empirical findings support the modernization hypothesis that FDI is growth promoting in Nigeria. eywords: Co-integration, economic growth, error correction, FDIJEL CLASSIFICATION: F21, F30, F23, 040. INTRODUCTION Within policy circles, there is a widespread belief that Foreign Direct Investment (FDI) enhances the productivity of host countries and promotes economic development. This notion stems from the fact that FDI may not only provide direct capital financing, but also create positive externalities via the adoption of foreign technology and know-how (Alfaro et al., 2009). However, the empirical evidence on the existence of such positive productivity externalities is sobering (Alfaro and Rodriguez-Claire, 2004). During the past two decades, FDI has become increasingly important in the developing world, with a growing number of developing countries succeeding in attracting substantial and rising amounts of inward FDI. Economic theory has identified number of channels through which FDI flows may be beneficial to the host economy. Yet, the empirical literature has logged behind and has had more trouble identifying these advantages in practice. Most prominently, a large number of applied papers have looked at the FDI- Growth nexus, but their results have been far from conclusive. However, with the availability of better data, the last few years have seen an especially large number of empirical papers devoted to the question (haliq and Noy, 2007). Nigeria as a country, given her natural resource base and large market size, qualifies to be a major recipient of FDI in Africa and indeed is one of the top three leading African countries that constituently received FDI in the past decade. However, the empirical linkage between FDI and economic growth in Nigeria is unclear, despite numerous studies that have examined the influence of FDI on Nigeria s economic growth with varying outcomes (Oyinlola, 1995; Adelegan, 2000; Akinlo, 2004; Ayanwale, 2007). Close examinations of previous studies reveal that conscious effort has not been made to take care of the fact that more than 60% of the FDI inflows into Nigeria is directed towards the extractive (oil) industry. Finally, empirical literature indicates that a country s capacity to take advantage of FDI externalities might be limited by local conditions. Further, there is increasing resistance to further liberalization within the economy. This thus limits the options available to the government to source funds for development purposes and makes the option of seeking FDI much more critical. This study contributes to existing literature by examining the relationship between FDI inflows and Nigeria s economic growth; hence it addresses the country s specific dimension to the FDI growth debate. The main objective of this study is to examine the relationship between FDI inflows and economic growth in Nigeria by testing the validity of the two contending hypothesis (modernization and depending) hypothesis in Nigeria. While the modernization hypothesis posits that FDI could be growth promoting, the depending hypothesis opine that FDI could have deleterious long term impact on growth. The study considers more scope (between 1970 and 2008) as well as tries to ascertain the long-run sustainability of the FDI- induced growth process in the country. REVIEW OF LITERATURE AND THEORETICAL UNDERPINNING Until recently, empirical literatures had perceived FDI has been parasitic and retarding for the development of domestic industries for export promotion. Hence, Corresponding Author: M.S. Ogunmuyiwa, Department of Economics, Olabisi Onabanjo University, Ago-Iwoye, Nigeria P.O. Box, 285, Ota Ogun state, Nigeria, Tel.:

2 research interest in FDI stems from the change of perspectives among policy makers from hostility to conscious encouragement, especially among developing countries. Caves (1996) observes that the rational for increased efforts to attract more FDI by host countries emerges from the belief that FDI are productivity gains, technology transfers, introduction of new processes, management skills, and know how in the domestic market, employee training, international production networks and access to markets. Curiously, the empirical evidence of the benefits both at the firm level and at the national level has been ambiguous. De Gregorio (2003), while contributing to the debate on the importance of FDI, notes that FDI may allow a country to bring in technologies and knowledge that are not readily available to domestic investors, and in this way increases productivity growth throughout the economy. FDI may also bring in expertise that the country does not possess, and foreign investors may have access to global markets. The vast majority of research work on the relationship between FDI and economic growth are not situated in Africa; however, there have been some studies on investment and growth in Nigeria with varying results and submissions. Odozi (1995) reports in his study on the factors affecting FDI inflow into Nigeria in both the Pre and Post- Structural Adjustment Programme (SAP) eras found that the macro policies in place before the SAP were discouraging foreign investors. This policy environment led to the proliferation and growth of parallel markets and sustained capital flight. Ariyo (1998) studied the investment trend and its impact on Nigeria s economy growth over the years. He found that only private domestic capital consistently contributed to raising GDP growth rates during the period considered ( ). Furthermore, there is no reliable evidence that all the investment variables considered in his analysis have any perceptible influence on economic growth. He therefore suggested the need for an institutional rearrangement that recognizes and protects the interest of major partners in the development of Nigerian economy. Adelegan (2000) explored the seemingly unrelated regression model to examine the impact of FDI on economic growth in Nigeria and formal out that FDI is pro-consumption and pro-import and negatively related to gross domestic investment. Akinlo (2004) found that foreign capital has a small and not statistically significant effect on economic growth in Nigeria. Furthermore, Odozi (1995) in his examination of the nature, determinants and potentials of FDI in Nigeria noted that foreign investment in Nigeria was made up of mostly Greenfield, that is, it is mostly utilized for the establishment of new enterprises and some through the existing enterprises. Anyanwu (1998) identified changes in domestic investment, change in domestic output or market size, indigenization policy and change in openness of the economy is the major determinants of FDI. Anyanwu further noted that abrogation of the indigenization policy in 1995 encouraged FDI inflow into Nigeria and that effort must be made to raise the nation s economic growth so as to be able to attract more FDI. Finally, Ayanwale (2007) in his study on FDI and Nigeria economic growth assert that FDI on communication has the highest potential for contributing to growth; hence, it needs to be properly channeled into the main stream of the economy. He noted that communication FDI s potential contribution is several times more than that of oil FDI. METHODOLOGY This study makes use of time series data sourced from statistical Bulletin, Economic and Financial Review and Annual Reports and Statement of Accounts of the Central Bank of Nigeria (CBN) and the Federal Office of Statistics (FOS). The macroeconomic data cover Gross Domestic Product (RGDP) and Foreign Direct Investment between 1970 and The model: The model for this study uses Granger causality test to ascertain the direction of causality between GDP and external debt in Nigeria between 1970 and Other econometric tests such as unit root test, co integration test and error correction mechanism were also performed to determine the stationarity of the data and the long run relationship between the variables. The test procedure as described by (Granger, 1969) is illustrated below: RGDP t = A j FDI t-i + B j RGDP t-- j + Uit (1) j 1 j 1 FDI t = C i FDI t-i + D j RGDP t-j + U2t (2) j 1 j 1 Equation (1) postulates that current RGDP is related to past values of itself as well as that of FDI and viceversa for Eq. (2). Unidirectional causality from FDI to RGDP is indicated if the estimated coefficient on the lagged FDI in Eq. (1) are statistically different from zero as a group (i.e 3 Ai 0) and the set of estimated coefficients on the lagged RGDP in Eq. (2) is not statistically different from 0 (i.e 3D j = 0).The converse is the case for unidirectional causality from RGDP to FDI. Feedback or bilateral causality exists when the sets of FDI and RGDP coefficients are statistically different from 0 in both regressions (Gujarati, 2004). Also, the methodology adopted in this study follows the study of Ayanwale (2007). He noted that investment in a foreign country is categorized into two; marketseeking and non-market-seeking, which are both 339

3 motivated by characteristics of the host country. The markets seeking investments aim at serving domestic markets by selling goods produced in host markets in those markets. For non market seeking, FDI aim to sell the good produced in the host economy on markets abroad. Since Nigeria is a beneficiary of both types of FDI it will likely influence the nation s economic growth. Although, the evidence for the impact of FDI on economic growth is far from conclusive, there seems to be some agreement as to the main determinants of growth. In the past, two main hypothesis on the influence of FDI on economic growth has been identified; the modernization hypothesis and the depending hypothesis (Ayanwale, 2007). The modernization hypothesis points that FDI promotes economic growth by providing external capital and through growth, it spreads the benefits throughout the economy. On the other hand, the depending thought insists that there is deleterious long term impact of FDI on growth. However, the foregoing suggests that a general empirical model of FDI on Nigeria s economic growth can be formulated. Hence, following the theoretical discussion above and Ayanwale (2007) specification, the standard long-run growth-fdi function written in logarithm form is presented as: )InRGDP = $ 0 + $ 1 )InFDI +, i (3) where, In is natural logarithm, RGDP is the real gross domestic product. A proxy for growth, FDI is the foreign direct investment, $ 0 is the constant term $ 1 is the slope while is the error term. The neoclassical aggregate production function (Ram, 1985) serves as a basis for the above postulated equation. Also, on the basis of the earlier discussion, the expected sign for the efficiency of FDI is positive according to the modernization hypothesis i.e., $ 1 > 0. RESULTS AND DISCUSSION In modeling the Growth-FDI relationship, each of the series entering the model is estimated to determine whether it is stationary and the order of their integration. The results of the Augmented-Dickey Fuller (ADF), Dickey and Fuller (1979) and Philips-Peron (PP) unit rots tests are reported in the Table 1: The test result in Table 1 reveals the presence of unit root in the properties of each series at their respective levels. However, after taking their first differences, the ADF test statistics reveals stationary in the series. The PP test on the other shows level stationarity in InRGDP while InFDI is stationary at its first difference. The level of significance for the tests is given at 1%. Studies have shown that these tests lack power in small samples; however, other studies give more credence to the PP test because of its validity even if the disturbances are serially correlated and heterogeneous while the ADF tests require that the error term be serially uncorrelated and homogeneous. Despite the shortcomings of these tests, we cannot over-emphasize their importance for empirical modeling because they show the order of integration among variables. Given the unit-root properties of the variables, we proceeded to establish whether or not there is a long-run co-integrating relationship among the variables by using the Johansen full information maximum likelihood method (Johansen and Juselius, 1990; Johansen, 1995). The result of the co-integration test is presented in Table 2. The result reported for the trace test and maximum eigen value statistics shows that the null hypothesis of no co-integrating relation linking InFDI and InGDP is rejected at the 5% level of significance. The two tests indicate one co-integrating equation between the two series. Table 1: Unit root test result ( ) Lag length: 1 Levels First differences Order of integration Variables ADF PP ADF PP ADF PP InRGDP I(1) I(0) InFDI I(1) I(1) Critical values 1% % % Table 2: Johansen maximum likelihood co-integration test result ( ) Panel A: Maximum eigenvalue and trace tests Hypothesized Max-eigen 5% critical Trace 5% critical No of CE(s) Eigenvalue statistics value Prob. staistics value Prob. None* At most *: Indicates rejection of the null hypothesis at 5% significance level 340

4 Table 3: Error correction model result ( ) Variable Coefficient t-statistic Probability Constant D(GDP(-1)) D(GDP(-4)) D(FDI) D(FDI(-2)) D(FDI(-4)) ECT(-1) R-squared: ; F-statistics: ; Adjusted R-squared: ; Probability (F-stat.): ; Akaike Info Criterion: ; Schwarz Info Crit.: Table 4: Granger causality test result ( ) Lags: 4 FDI does not granger cause GDP GDP does not granger cause FDI Dynamic error correction specification: So far, the result of the co-integration shows that the variables in the specified model tend to move together in the long-run. The short-run deviations from this relationship could occur due to shocks to any of the variables. The short-run interaction and adjustment to long-run equilibrium between the variable is obtained through the Engle- Granger method. According to Engel and Granger (1987), if co-integration exists between non-stationary variables, then an error-correction representation of the type specified by equation below exists for these variables. InRGP InRGP k 1 t k 1 t 1 1 t 1 InFDI ECT t 1 2 t 1 3 t 1 t (4) ECT t-1 is the error correction term, which is the fitted residuals from the co-integrating equation and : t is a white noise error term. The error correction term shows how the system adjusts to the long-run equilibrium implied by the cointegration equation. In choosing the optimal lag for the right-hand side variable, the general-to-specific method of eliminating insignificant lags is employed. Accordingly, we initially estimated an error correction model with four lagged differences in the explanatory variables, one constant term and one Error Correction (ECT t-1 ) term. The dimension of the over- parameterized model was then reduced to a parsimonious ECM specification by using sequential F tests, Akaike information criterion and Schwarz information criterion to exclude the statistically insignificant lags. The result of the reduced short-run dynamic model is presented in Table 3. As expected, the Error Correction Term (ECT t-1 ) is of the expected negative sign and highly significant. this result substantiate the finding of the co-integration test earlier reported more importantly, the absolute value of the coefficient of the error correction term indicates that 4% of disequilibrium in growth in offset by short-run adjustment each year. The result further show that RGDP is influenced by its previous period values as well as current and previous values of foreign direct investment. The coefficient of determination (adjusted r-squared) used to measure the goodness-of-fit of the estimated model, indicates that the model in accurate in prediction as it shows that 71% of variation in the endogenous variables is accounted for by the included explanatory variables. The probability value of the F-statistics further revealed that there is joint significance of the explanatory at 1% level. Causality test: The Granger causality test as shown in Table 4 is carried out to determine causality between InRGDP and InFdI. The test result shows that the null hypothesis that InFDI does not Granger cause InRGDP is rejected at 5% level of significance. While the null hypothesis that InGDP does not Granger cause InFDI is accepted This implies that a unidirectional causality emanates from foreign direct investment to real GDP. This thus explains that an increase in amount of foreign capital inflow could lead to an increase in the growth of the economy. CONCLUSION AND POLICY IMPLICATION The objective of this study is to explore the relationship between FDI and GDP growth in Nigeria by testing the validity of modernization or depending hypothesis in the pre-policy reform (Structural Adjustment Programme) and post-policy reform era in Nigeria. The findings of the study support the modernization hypothesis and this indicates that FDI contributes positively to Nigeria s economic growth despite the structural change in the flow of FDI to the economy. However, there is a strong need for the improvement in the nation s business environment in order to attract more foreign investors, by consciously curbing corruption through intensified and improved efforts of the two antigraft agencies (EFCC and ICPC). Further, there is need to liberalize and improve the energy sector, such that adequate electricity is supplied to organizations at lower cost in order to reduce the cost of doing business in the country to the minimum. Finally, there is a critical need for the integration of the nation s human resources through improved education and training to enable them contribute significantly into the growth process especially by competing with their foreign counter-parts that invest in home country. The availability of high quality personnel in the country will motivate and foster the inflow of foreign capital into the domestic economy. 341

5 BIOGRAPHY: OGUNMUYIWA, M.S lectures economics at Olabisi Onabanjo University. He has authored and co-authored several books, published in reputable journals and has attended some learned conferences. OGUNLEYE, O.J also lectures accounting in the faculty of business administration, university of Lagos. She has published some articles in journal and has attended some conferences. REFERENCES Adelegan, J.O., Foreign Direct Investment and Economic Growth in Nigeria: A seemingly Unrelated Model. African Review of Money, Finance and Banking. Supplementary issue of Savings and Development, Italy, Milan. Akinlo, A.E., Foreign direct investment and growth in Nigeria: An empirical investigation. J. Policy, Model., 26: Alfaro, L., A. Chanda,. Sebnam and S. Sayek, Does foreign direct investment promote growth? exploring the role of financial markets on linkages. J. Int. Econ., 64: Alfaro, L. and Rodriguez-Claire, Multinationals and Linkages: Evidence from Latin America. Economica, 4: Anyanwu, J.C., An Econometric Investigation of Determinants of Foreign Direct Investment in Nigeria in the Growth Process. Proceedings of Nigerian Economic Society Annual Conference, Nigeria, Ibadan, pp: Ariyo, A., Investment and Nigeria s Economic Growth in Investment in the Growth Process. Proceedings of Nigerian Economic Society Annual Conference, Nigeria, Ibadan, pp: Ayanwale, A.B., FDI and Economic Growth: Evidence from Nigeria. African Economic Research Consortium (AERC) research paper 165, Nairobi, April. Caves, R.E., Multinational Enterprise and Economic Analysis. 2nd Ed. Cambridge University Press, Cambridge. De Gregorio, J., The role of foreign direct investment and natural resources in economic development. Working Paper No 196. Central Bank of Chile, Santiago Dickey, D.A and W.A. Fuller, Distribution of the estimators for autoregressive time series with a unit root. J. Am. Stat. Associ., 74: Engel, R.F. and C.W.J. Granger, Co-integration and error correction: Representation, estimation and testing. Econometrica, 55: Granger, C.W.J., Investigating causal relationships by econometric models and cross spectral methods. Econometrica, pp: Gujarati, D.N., Basic Econometrics. Tata McGraw Hill Publishing Company Limited. 4th Edn., New Delhi, India, Johansen, S., Likelihood-based Inference in Cointegrated Vector Autoregressive Models. Oxford University Press, London. Johansen, S. and. Juselius, Maximum Likelihood Estimation and Inferences on Co-integration-with Application to the Demand for Money. Oxford Bullettin of Economics and Statistics, 52: haliq, A. and I. Noy, Foreign Direct Investment and Economic Growth: Empirical Evidence from Indonesia. Odozi, V.A., An Overview of Foreign Investment in Nigeria Occasional Paper No. 11. Research Department. Central Bank of Nigeria. Oyinlola, O., External capital and economic development in Nigeria ( ). Nigerian J. Econ. Soc. Stud., 37(2-3): Ram, R., Exports and economic growth in developing countries: Evidence from time series and cross section data. Econ. Dev. Cultural Change, 36: